Spring 2023
Quarter-long Stock Market Simulation Portfolio Management Project
Scroll ↓
Overview
Within my Securities and Portfolio Management class, a key portion of the course was a quarter-long stock market portfolio management project. This project saw the entire class competing in a stock market simulation where each person is given $1,000,000 to trade. It was then up to each person to make educated investment decisions in order to maximize their earnings in an attempt to have the highest returns. I made it my goal to at least beat the S&P 500’s returns over the same time period, which would mean about a 1.6% return in 7 weeks. We were given two separate accounts, one for passive investments of which we would invest the entire million dollars in the first week and not touch until the end of the competition, and an active account which we were expected to make at least 80 trades throughout the quarter.
Active vs. Passive Trading
For the passive portfolio, inspired by Warren Buffett's buy-and-hold strategy, we focused on making a few, well-considered investments in high-conviction assets like ETFs that track the S&P 500 and stocks we believed in for the long term, such as Amazon. This strategy paid off, yielding a return that exceeded our expectations and the market. In contrast, our active portfolio strategy was more hands-on and diversified across industries and asset classes. It involved frequent trading based on both fundamental and technical analysis. While it was a more time-intensive approach, it provided invaluable insights into the benefits and challenges of active management. Interestingly, the minimal difference in performance between our active and passive portfolios was a compelling lesson in the efficiency of markets and the potential of passive investing.
Excel
In order to successfully manage and analyze our portfolio, we kept a detailed spreadsheet of each and every trade that we conducted in order to have a detailed account of what we did and why. We then were able to
Using Excel, I performed advanced analyses such as Optimal Complete Portfolio analysis, which is simplified in the excel screenshot below, and Sensitivity analysis to find the optimal ratio of each one of my positions. I was able to re-evaluate my positions on a week-by-week basis and rebalance the amount of capital I had in each stock in order to optimize my return and reach my desired market volatility level (beta). This was done by applying a 10-step process of formulas to determine each holdings’ return rate, variability rate (sigma), and covariance.
Finance Concepts
Throughout the simulation, several key finance concepts were brought to life, guiding my investment decisions and strategy formulation. The concept of Beta, or market volatility, was central to our approach, informing our decision to aim for a portfolio with slightly higher volatility than the market to achieve greater returns. We also explored the critical role of diversification in managing idiosyncratic risk and the importance of investment objectives in guiding portfolio construction and strategy. These concepts were not just academic exercises; they were practical tools that shaped our investment approach, influencing every trade and decision we made in pursuit of our goal to outperform the market.
Useful Resources
In our project, we heavily utilized Zacks.com for its detailed stock screeners and technical analysis tools, helping us pinpoint potential investments. For historical data, we turned to Yahoo Finance, essential for our Excel portfolio optimization efforts by providing the data needed to adjust our strategies effectively.
Takeaways
The StockTrak simulation was a comprehensive learning experience that expanded my understanding of the stock market's intricacies. It reinforced the importance of thorough research and analysis in informing investment decisions, highlighting how fundamental and technical analyses can serve as crucial tools in identifying investment opportunities and navigating market uncertainties. I learned the value of diversification, not just in terms of asset types but also across sectors and industries, to mitigate risk and enhance portfolio resilience. Moreover, the project underscored the significance of setting realistic investment objectives and aligning strategies with these goals, teaching me that success in trading requires patience, discipline, and a long-term perspective.